Dow crumbled Thu as China 'warned' the U.S. for countermeasures amid escalating 'war of words', but Dow Fut recovered Fri as both Trump and Xi sounds conciliatory rather than retaliatory

China will honor Phase-1 trade deal with the U.S. despite Trump’s cold war mentality

China will provide more monetary as-well-as fiscal stimulus going forward for its economy

Trump may comment on China’s HK issues ‘later at an appropriate time’

Dr. Fauci said the U.S. can reopen ‘now’ amid visible signs of COVID-19 curve flattening

The U.S. stock market (Dow Jones Industrial Average) closed around 24474.12 Thursday, slips almost -0.41% as China ‘warned’ the U.S. for countermeasures amid escalating ‘war of words’. On early Thursday, Dow slumped after China warned the U.S. with countermeasures if sanctions are imposed over COVID-19, HK, or any other issues (Muslim minority). China’s NPC spokesperson said China never starts trouble and never flinches when trouble comes its way. China will firmly defend its interests if the U.S. does things that undermine China's core interests.

There was another report that the 3rd session of 13th NPC (China) will address the draft decision of the National People's Congress (NPC) on the establishment and improvement of the legal system and implementation mechanism for the safeguarding of national security in the Hong Kong special administrative region. In brief, China is planning to pass a law that will outlaw anti-government protests in Hong Kong. The National Security legislation also aims to oppose the secession of the Chinese autonomous region and forbids foreign interference in Hong Kong.

In response, Trump said the US will have ‘a very strong reaction’ to China legislation in Hong Kong. Earlier, Republican Senator from Missouri Hawley said he was planning to propose a resolution in Congress that would condemn the newly-proposed Hong Kong national security law. Also, various U.S. Senators to propose bill sanctioning Chinese officials over Hong Kong security law The bill also proposes sanctioning banks who do business with officials.

On late Wednesday, in a series of tweets, Trump, who is now in full election mode, doubled down on China and oil was also undercut as Trump ramped up his China cold war narrative (ahead of the election) and criticized China’s political leadership (President Xi), which is rare even for Trump as he usually refrained from doing that. Trump said China is supporting Biden against him in the forthcoming Presidential election:

China is on a massive disinformation campaign because they are desperate to have Sleepy Joe Biden win the presidential race so they can continue to rip-off the United States, as they have done for decades until I came along!

Spokesman speaks stupidly on behalf of China, trying desperately to deflect the pain and carnage that their country spread throughout the world. Its disinformation and propaganda attack on the United States and Europe is a disgrace...It all comes from the top. They could have easily stopped the plague, but they didn’t!

China’s twitter proxy, the GT Editor Hu responded to Trump as cold war or war of words heats up: On the contrary, Chinese netizens wish for your reelection because you can make America eccentric and thus hateful for the world. You help promote unity in China and you also make intl news as fun as comedy. Chinese netizens call you “Jianguo,” meaning “help to construct China”.

On late Thursday, Powell said in his opening remarks at a ‘Fed Listens’ event: Selected texts

We are in the midst of an economic downturn without modern precedent. It was sudden, and it is severe. It has already erased the job gains of the past decade and has inflicted acute pain across the country. And while the burden is widespread, it is not evenly spread. Those taking the brunt of the fallout are those least able to bear it.

The pain of this downturn is compounded by the upending of normal life, along with great uncertainty about the future. In the best of times, predicting the path of the economy with any certainty is difficult. John Kenneth Galbraith famously said that economic forecasting exists to make astrology look respectable. We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook.

Policies that address the resumption of economic activity are the province of elected officials at all levels of government, in close consultation with public health and medical professionals. But all of us have our own decisions to make as well, and those decisions will depend on public confidence that it is again safe to undertake various activities.

The Fed VC Clarida said: (Selected texts)

---With these facilities, we are providing a bridge by stepping in and supporting lending throughout the economy until the recovery takes hold. These programs are designed to offer backstop sources of funding to the private sector, and just the announcement that these backstop facilities would soon be launched appears to have bolstered confidence in capital markets, allowing many companies to finance themselves privately even before the facilities were up and running.But importantly, these are, after all, emergency facilities, and someday—hopefully soon—the emergency will pass. When that day comes and we are confident the economy is solidly on the road to recovery, we will wind down these lending facilities at such time as we determine the circumstances we confront are no longer unusual or exigent.

Not only is the Federal Reserve using its full range of tools to support the economy through this challenging time, but our policies will also help ensure that the rebound in activity when it commences will be as robust as possible. That said, it is important to note that the Fed's statutory authority grants us lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries, to meet the payroll expenses of small businesses, or to underwrite the unemployment benefits of displaced workers.

Programs to support such worthy goals reside squarely in the domain of fiscal policy. The Fed can only make loans to solvent entities with the expectation the loans will be paid back. Direct fiscal support for the economy is thus also essential to sustain economic activity and complement what monetary policy cannot accomplish on its own. Direct fiscal support can make a critical difference, not just in helping families and businesses stay afloat in a time of need, but also in sustaining the productive capacity of the economy after we emerge from this downturn.

Fortunately, the fiscal policy response in the United States to the coronavirus shock has been both robust and timely.In four pieces of legislation passed in just over two months, the Congress has voted $2.9 trillion in coronavirus relief, about 14 percent of GDP. This total includes nearly $700 billion for the Paycheck Protection Program to support worker retention at small companies and more than $450 billion for the U.S. Treasury to provide first-loss equity funding for the Fed credit facilities that I discussed earlier.

While the scale, scope, and timing of the monetary and fiscal policy responses to the coronavirus pandemic are unprecedented and will certainly cushion the blow the shock inflicts on the economy, the shock is severe. Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for.

Concluding Remarks

The coronavirus pandemic poses the most serious threat to maximum employment and, potentially, to price stability that the United States has faced in our lifetimes. There is much that policymakers—and epidemiologists—simply do not know right now about the potential course that the virus, and thus the economy, will take.But there is one thing that I am certain about: The Federal Reserve will continue to act forcefully, proactively, and aggressively as we deploy our toolkit—including our balance sheet, forward guidance, and lending facilities—to provide critical support to the economy during this challenging time and to do all we can to make sure that the recovery from this downturn, once it commences, is as robust as possible.

The Fed Governor Brainard said in his prepared remarks:

We have heard that maximum employment is not captured in a single national average, it brings vital benefits, and it takes a very long time to arrive in many neighborhoods. We have heard that inflation matters: Households at different life stages and in different places are balancing the cost of living against their earnings, while businesses are balancing wages and other costs against their pricing power. We have heard that access to credit matters, and that it is important to use the full range of tools to support the economy.

On Thursday, Dow was also buoyed as Fed’s VC Clarida indicated more monetary as-well-as fiscal stimulus in the coming days so that the current short term corona recession does not turn into a long term economic depression. But Dow was also undercut as Fed’s Brainard raised doubt about the credibility of U.S. economic data that may have failed to capture the real employment and inflation scenario of the U.S. economy. Brainard basically said the underlying economic data failed to capture the Real Street. Brainard; remarks forced Powell to clarify that her comments do not represent the official FOMC view.

On late Thursday, Dow tumbled more after Fed’s Chair Powell said: The U.S. economy is facing a whole new level of uncertainty amid coronavirus pandemic. The virus outbreak triggered a broad shutdown of the majority of the nation's economy. I believe that the economy will be on the road to recovery fairly soon, but full recovery will take time (at least the end of 2021).

On Thursday, Dow was also undercut by worse than expected jobless claims data. The initial jobless claims flashed at 2.438M against prior 2.687M (revised downwards from 2.981M), but slightly lower than the market expectations of 2.400M. The continuing jobless claims flashed at 25.073M from prior 22.548M (revised downwards from 22.833M), and higher than the expectations of 24.765M. The 4-week moving average of initial jobless claims, better gauze to chart the overall trend as it removes w/w volatility drooped to 3.042M from prior 3.543M (revised lower from 3.616M).

Overall, the number of Americans filing for unemployment benefit dropped consecutively for the week ended 16th May from the peak of 6.867M (on the week ended 29th Mar) to 2.438M, the lowest level since the COVID-19 job crisis began from mid-March, around 8-weeks ago. A cumulative 38.6M jobless Americans have filed for the statutory unemployment benefit (employment insurance program) as-well-as under generous CARES Act by the U.S. Congress. The U.S. Continuing jobless claims jumped to another record high of 25.073M for the week ended 9th May.

As per the present correlation between continuing jobless claims and NFP payroll data, the May NFP ‘may’ flash around -22.50M (job cuts). The elevated levels of U.S. jobless claims may continue till July when the current employment support program is scheduled to end. The public confidence may be a big factor in reopening the country/economy going forward. And in that sense, an effective vaccine or even a therapy is most important, even if it may act as only a placebo. And if the U.S. COVID-19 curve does not flatten fully in June, then we may see another deluge of stimulus and relief measures for the U.S. workers.

On Thursday, Trump was asked about Mnuchin’s comments - the U.S. may need another stimulus. Trump said although this corona recession (1 year) is different from 1930’ deep economic depression (10-15 years), he may require another dose of the stimulus (monetary vaccine) going forward; i.e. Trump may be also assuming no big-bang reopening of the economy by June/July:

I think we will. I think we’re going to be helping people out. We’re going to be getting some money for them during the artificial — because it really is, it’s an artificial closure. And now we’re going to be able to open it up. This isn’t like for long-term problems and it takes years and years to have it come back. The Depression took 12 years — more — 14, 15 years. We’re going to be back next year, maybe even in the fourth quarter. In a few months, we’re going to be back, because we’re going to — we closed it and now we open it. But I would say there could be one more nice shot. One more nice dose----Well, I’d let you know. And I have exactly — I know exactly, but I’d rather do it (including payroll tax cut) at the appropriate time.

On a potential Astra Zeneca vaccine (Oxford), Trump said there is a tremendous prospect:

Great--- think it holds tremendous promise. But we have many other companies who are just about as far along. We have many companies. We have the greatest pharmaceutical companies in the world. They’re equally — you know, I mean, they’re really in a position. And I’m only — I’m not only talking about vaccines, but I’m also talking about cures and therapeutics. Therapeutically, we have some things coming out which we think are going to be great. But they have to be tested quickly, and we’re doing it very quickly.

So rather than having the vaccine, doing the test, and then starting to gear up, we’re taking a risk because, you know, it could be that if something happened, but I don’t think that’s going to be. But in addition to that company, we have other companies that are very far advanced. And also, don’t forget therapeutics and cure. We’re talking about a vaccine in this case. Therapeutics and cure --- And, frankly, that’s my first choice because that would take care of people that are in trouble right now.

Trump was asked about his comments a number of weeks ago: ‘We can’t let the cure become worse than the disease’. Trump basically clarified the U.S. must open up, otherwise, unemployment would kill much more than the coronavirus:

That’s true---- I think I was the first one to say it. I don’t know, would you say that I was the first one? But you can’t let the cure become worse than the problem itself. I think we have to — I think the governors have to start opening up. We now know the disease. We know the weaknesses and strengths. We know that older people are affected gravely and younger people are not affected gravely, frankly. If you look at the statistics, it’s incredible. And we know that we have to protect some people much more so. I think a lot of the governors have done a very, very poor job in nursing homes, but they’ve done a good job on other things.

Trump was then asked about the latest U.S. Jobless claims of 2.4M. Trump elaborated that it’s because of the rigidity of some states, they are not opening up properly and that’s why overall unemployment levels are still high. And Trump also defended his decision to close the country in mid-March as that has saved millions of lives:

I think that a lot of these states are going to — the ones that are, sort of, sticking to a certain, very rigid pattern; I think they’re going to stop. I don’t think the people are going to stand for it. This is a country that’s meant to be open, not closed. And we did the right thing, John. We saved millions of lives---Millions and millions of lives. You would have had anywhere from a million-five to two million-five, three million lives. Think of it: So if we were at 100,000, instead of 100,000, multiply that times 15, 20, or 25. It wouldn’t have been acceptable. It wouldn’t have been sustainable. You couldn’t have done it.

So we’ve called it right. And now I want it open, and we’re going to open. And if there’s a fire, an ember, a flame someplace, we put it out. But the people have done a great job. And General Electric, Ford, and all the other people that work with them have done fantastic work. And Honeywell — again, I was there last week — but Honeywell, they’ve done fantastically well, also. Okay?

And finally, Trump also declared that he will not close the country in the event of a 2nd COVID-19 as such phenomenon is ‘standard’ and the U.S. has now the experience/knowledge how to contain such small 2nd wave:

People say that’s a very distinct possibility (about 2nd wave of COVID-19). It’s standard--And we’re going to put out the fires. We’re not going to close the country; we’re going to put out the fires. There could be — whether it’s an ember or a flame, we’re going to put it out. But we’re not closing our country.

On late Friday, Dow Future was almost flat and off the session low (-273 points) on hopes for more easing of corona lockdown after Dr. Fauci said now is the time to reopen the economy and the NY Governor Cuomo pointed out new cases in NY lower than that of at the initial stage (visible signs of COVID-19 curve flattening). Fauci also said the initial trial of Moderna’ mRNA vaccine is ‘encouraging’

On COVID-19 vaccine and therapeutics front, there was a report thatChinese scientists identified multiple highly potent neutralizing antibodies that have proven effective in an animal model, which offers the promise to cure COVID19 patients and prevent patients' family or doctors from infection on a short-term basis.

Dow was also boosted as China’s President Xi took more of a conciliatory approach in his NPC speech rather than fire & fury with regards to Trump’s cold war. China also stressed on honoring its commitments for the Phase-1 trade deal with the U.S. rather than ‘cutting the whole relationship’. China also emphasized on higher fiscal as-well-as monetary stimulus for the economy going forward (including cutting tax/VAT rates), while will reduce non-essential government spending for a balanced fiscal approach.

Although China reiterated about HK National Security Law, on late Thursday, Trump said he will comment on it later at an appropriate time. Trump also noted that although the Fed has a lot of ammunition left, thanks to the generous support from the U.S. Treasury, his admin will not use such unlimited tools from the Fed unless there is another exigency.

But on Friday, Dow Fut was also undercut as the White House CEA Hassett ‘warned’ that all options are on the table for China and the Trump admin is studying very closely economic penalties for China.

Bottom line:

Although Trump will ramp up his anti-China rhetoric on CIVID-19 in an attempt to shift the entire blame (to China and the WHO) ahead of Nov’20 election, he will not cross the ‘Laxman Rekha’ (red line) for a point of no return. Trump is now in full election campaign mode and trying to shift the blame for the horrible corona deaths in the U.S. to China. Also, we may see renewed Trump trade war tantrum not only against China but also against Europe/Germany as tariff man Trump ultimately needs higher revenue to balance surging U.S. fiscal deficit to some extent. And tariff policy will also help Trump’s ‘Make in America” theme-shun global, use local and be vocal (America First policy). Such a trade/cold war strategy and the resultant synchronized global slowdown (2019 playbook) will be also negative for risk-assets, like Dow post-COVID-19.

Trump is now actually trying to give confidence to the public to go out and enjoy summer sunshine (without COVID-19 infection scarring) along with HCQ as a ‘first line of defense’ (an alternative to a potential vaccine), although it may cause even death when taken without close medical observations.

Technically, whatever may be the narrative, SPX-500 now has to sustain over 2960 for a further rally to 2985*/2035-3050/3090 and 3135/3185-3205/3225* in the near term (under bullish case scenario).

On the flip side, sustaining below 2950, SPX-500 may fall to 2915/2895-2875*/2845 and 2820/2770*-2750/2710 and further to 2690/2675-2635*/2610 in the near term (under bear case scenario).

Technically, whatever may be the narrative, DJ-30 now has to sustain over 24650 for a further rally to 24800*/25200-25550/25800* and 25950/26200-26400/26650* in the near term (under bullish case scenario).

On the flip side, sustaining below 24600, DJ-30 may fall to 24300/23900*-23600/23200* and 23000/22800*-22600/22400* and further 22100/21800-21500*/21200 in the near term (under bear case scenario).

Technically, whatever may be the narrative, NQ-100 now has to sustain above 9355 for a further rally to 9435/9505*-9600/9675 and 9725/9775*-9825/9850* in the near term (under bullish case scenario).

On the flip side, sustaining below 9325-9300, NQ-100 may fall to 9095*/9000-8950/8700* and 8550*/8500—8450/8370* and 8300/8150-8070/7900* in the near term (under bear case scenario).

Note: 14/05/2020

SPX-500: SUP-RES: 2915/2875/2845-2960/2985/3015

DJ-30: SUP-RES: 23750/23600/23100-24500/24650/24875

NDQ-100: 9110/8980/8845-9355/9435/9505

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